FOMC in the Balance…Sheet

It feels like we have been building up to this day for quite some time now. This morning we have UK Q2 GDP, while in the evening the US Fed will announce its latest plans for interest rates, where they are also expected to let markets know their plans for unwinding their balance sheet. Overnight we also had inflation figures from Australia, where June’s figure unexpectedly fell below 2 percent, and remained below target for the sixth straight quarter. The figure here will be a reminder to markets that the RBA are still a far way off their neutral interest rate target of 3.5 percent. The Australian’s economy however is very sensitive to raw materials prices and energy input costs so a rebound here could prove likely if oil prices stay buoyed.

Crude oil prices have rallied over 3 percent to 7 week highs over the past 24 hours after the progress made at OPEC meeting, combined with signs of a slowdown in US shale production. Markets will be keeping a particular eye on oil inventories from the US this afternoon too, a surprise here and we could see crude fall back below the $50 a barrel mark.

In the US, no major policy changes are expected from today’s FOMC meeting. All signs point to the committee waiting to confirm that the US economy is on track before looking to raise rates in the future. Commencement of a balance sheet roll off seems imminent, although it seems unlikely to begin this month, and even less likely to be pre-announced today. The FOMC membership seems to be polarised in opinions at present and many of the murmurs coming from them have not been as co-ordinated as one would expect prior to a decision to raise rates. In March, for example, we saw correlated statements from FOMC members move capital markets in an explicitly intentional way. We have seen no unity on communication prior to today’s meeting, hence why we are unlikely to see any significant policy decisions.

The FOMC may, however, choose to comment on the under-performance of inflation thus far, although Chairman Yellen is likely to reiterate her expectation that inflation will move up to its 2% target in the near term. Aside from this, it is not expected that the FOMC’s stance on economic policy will significantly change.

In the UK where data this morning is expected to show growth in the Q2 improved slightly from the first, with data from April to June expected to have grown at a pace of 0.3 percent and the annual rate to be 1.7%. . Many would have expected the UK to be in a stronger position given the weakness in the pound, but this isn’t happening. One reason for this looks to the jaded consumer who are struggling with high inflation and lower wage growth. Today’s figure however could be what the pound needs to finally break significantly above the 1.30 mark against the dollar, while it may also keep .90 level at bay against the euro for a little longer.

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